Rethinking dealcraft

The traditional approach to dealmaking is out of step with today's corporate governance and risk paradigms and requires a complete overhaul.

Half the words in deal papers merely repeat what has been said somewhere else -- what do page after page of, for example, environmental representations add to the basic compliance-with-laws representation? Little, if anything, especially given materiality qualifiers. Depending on the deal, the "due diligence" representations about contracts, benefit plans, leases and the like should be relegated to where they belong -- due diligence. Finally, what's the point of spelling out detailed procedures for exchanging stock certificates and the like -- is there any question how these things work?

Setting the boilerplate aside leaves only a handful of pages that really count -- the money, social, closing and, in a public deal, fiduciary provisions. And, as we saw when the going-private deals unraveled in 2007, these provisions don't work very well when actually tested. From our clients' perspective, it may not be acceptable to accept the market definition of, for example, a "material adverse change" just because doing otherwise is difficult.

It's high time we stand back and completely revamp the basic terms of M&A papers, eliminating the boilerplate that is never relevant in the real world and advancing concepts that actually work when markets turn or expectations change. The technology for this -- reverse breakup fees, ticking fees, deposits and the like -- has been around for a while, but it is not used nearly as much as it should be or nearly as effectively as it could be.

All of this needs to be considered against the backdrop of the new corporate governance paradigm. While commonly said to have been the product of the accounting scandals associated with the bursting of the 1990s stock market bubble, in reality its causes are far more fundamental, particularly the democratization of ownership of public companies through 401(k)s, IRAs, 529s and, now, direct governmental equity stakes in key businesses. Cries for far more fundamental change in corporate governance and related areas such as executive compensation are predicated on perceived failures in risk assessment and management. Whether they lead to new formal requirements -- like the board "risk committees" that would be mandated by Sen. Charles Schumer's "Shareholder Rights Act" -- they have already shifted the dealmaking paradigm inside the boardroom.

Deal professionals are behind the curve on this, partly because we've become pigeonholed in our own specialties -- we rarely reach across lines between M&A, capital markets, restructuring or structured finance despite the fact that most concepts are common to all areas. But due diligence should not be a ritual carried out by a few otherwise unoccupied technicians. Strategic and financial buyers don't want summaries of pending claims; they are of little use. They want experienced litigators knowledgeable about the particular types of exposures to estimate, fairly, the dollar cost of settlement. They want regulatory experts who can give them real insight into where the laws are going, not what they are. They want labor experts who can assess the potential competitive import of a neutrality clause in a union contract in the context of an exit. They want substance, not paper.

Representations, closing certificates and mindless summaries of legal documents don't really contribute to meaningful risk assessment or management. In fact, too little of what deal professionals did in the past was really relevant to risk calibration, yet many of us are doing things more or less the same way, as if the paradigm hadn't changed.

All of this raises, of course, profound questions about how we approach our work, bill for our services, who really needs to play what roles in the deal process and which specialists should be involved in the effort. Risk is, and for the foreseeable future will remain, a four-letter word, especially in Washington and, more important, many corporate boardrooms. Dealmakers who can meet and address the stringent challenges of today's risk management and corporate governance paradigms will have a central place in the dealmaking process. Those waiting for a return to the boom times for cookie-cutter deal-production factories will end up in a different line of work.

Robert A. Profusek is global head of M&A at Jones Day in New York.